0% or 15% Down - Hard Money

[Sam Rust]

I'm getting into fix and flip here in the greater Denver area and have connected with several hard money lenders and wholesalers. Currently I have two paths open to me, I would welcome input! Currently I have $35k in cash in the bank and am 3 years into a 15 yr, 3.625% on my primary residence with about $230k in equity.

Scenario #1

Refinance my primary into a 30 yr and pull out an additional $145k in cash to use for the venture. I'm working on getting quotes, but I have excellent credit and anticipate a rate near 4%. I have spoken with several groups, the best deal so far is 11% interest, 2 points, 15% down, 1 year term. I'd be looking at houses in the $350-450 range, buying near 70% ARV.

Scenario #2

Use a 100% rehab loan, and leave my current loan in place on the primary. Best deal I've found so far is 15%, 4 points, with 9 month balloons and interest only payments. I'd be looking at very similar acquisitions, but would be forced to only look at dealsI can buy at or below 70% ARV.

I lean towards scenario #1, both the lower cost and the fact I'm taking action by refinancing appeal to me. It also seems a bit less risky as my cash reserves would be significantly higher. On the other hand, I can get into the game quicker, and with no money down in scenario #2.

Any thoughts would be appreciated!

[Steve K.]

@Sam Rust , I'm a big fan of the BRRRR method of fix and hold rentals. Have you considered it?

You still try and buy a 70% ARV property, but instead of selling (and suffering realtor commissions, closing costs and highest tax rate), you hold and rent the property for positive cash flow. The cash out refi gives you your capital back to "repeat".

You have precious capital to use to grow wealth with, and seem to be ready to use REI toward that goal. You have two buckets:

a) $35k ready to invest and try and earn 10% or 20% IRR

b) $230k equity that's helping you to avoid 3.625% to 4% APR payments. In other words, its' earning a 4% yield (only)

I wish I'd discovered BRRRR 35 years ago. Have you read some of the real life success stories on BP? Several taking a modest starting point and becoming financial free (i.e. retired) in 5 to 7 years?

Most would die to have the equity you have to begin. I'd recommend Scenario #1.

It's really hard to find a 70% ARV fixer-upper in Denver these days....so much competition. Most of the wholesalers I see are really acquisition + rehab at about 83% of ARV. Or, do your own due diligence....vet the ARV and rehab estimates yourself.

When I BRRRR a fix and hold, I have 4 profit streams:

a) I try to make 20-25% "fix profit" that's stored in the property (tax deferred)

b) the tenants are paying me a monthly net cash flow (after mortgage and all expenses); this is tax-efficient, after expenses, interest and depreciation)

c) the tenants are paying off the mortgage over the next 30 years....significant equity (also tax deferred)

d) Denver is appreciating nicely at 10% per year the last several years. With 75% leverage, I own/control more real estate that gets this appreciation (tax deferred until I sell)

When I flip & sell...I only get "a", then pay closing costs and higher taxes.

good luck!